Canada: Indoor Management Rule – Who Has Authority?

The "Indoor Management Rule" is well established in
Canadian law. This common law rule holds that parties dealing with
a corporation, acting in good faith and without knowledge of any
irregularity, are entitled to assume that a corporation's
internal policies and proceedings have been followed and complied
with. Some elements of the rule are codified in the various
provincial business corporations statutes.

In Accra Wood Products,1 the trustee in
bankruptcy (Trustee) used the Indoor Management Rule as the basis
for disallowing the secured claim made by Formations Inc.
(Formations) in the bankruptcy proposal process of Accra Wood
Product Ltd. (Accra). Formations had supplied raw wood materials to
Accra for use in Accra's wood moulding manufacturing business.
Their arrangements were documented in a credit application which
Formations had provided to Accra, which application included a
clause granting a security interest to Formations. That security
interest covered all of Accra's present and after-acquired
personal property. The credit application was completed and signed
by Accra's office manager, Lisa Golding. After the execution of
the credit application, the parties operated under the contract for
two years without there being any hint of a problem with the
granting of that security interest to Formations.2

The Trustee disallowed Formations' secured claim on two
grounds: (1) Golding, as the Office Manager of Accra, did not have
the authority to execute the credit application granting Formations
a security interest over Accra's property and Formations knew
or ought to have known that she did not have such authorization;
and (2) the term of the credit application was inconspicuously
included in the fine print and was not drawn to the attention of
the person signing. The Trustee further argued that (a) it is not
typical for a supply credit application to contain a clause
granting the supplier a security interest, (b) it is not typical
for an "office manager" or "accounts payable
contact" to have the authority to grant such a security
interest, and (c) in lending practice it is standard to obtain
directors' resolutions from a company when obtaining a security
interest to ensure that the security interest has been duly
authorized and granted.3 In support of the Trustee,
Accra contended that it had no intention of granting Formations a
security interest.4

In considering Formations' appeal, Justice Masuhara of the
British Columbia Supreme Court reviewed prior case law to determine
the scope of the Indoor Management Rule designed to protect
innocent third parties who rely on authority of the agent.

In Justice Masuhara's view, the Trustee had placed undue
reliance upon Golding's limited authority. There was no
internal documentation produced to substantiate the limits on her
authority. It was also apparent that credit applications were
normal transactions for Accra and that it was standard procedure
for Golding to execute such documents on behalf of Accra. Indeed,
security had been granted to other creditors with similar credit
applications. Further to this, Golding had been the office manager
of Accra for approximately 23 years. For this reason, the Court
noted that it was fair to assume that she was knowledgeable of the
internal processes of Accra.5 Another important factor
in the Court's determination was that Golding had clearly read
the credit application as she had crossed out those sections that
would have imposed joint and several liability upon her as the
signatory of the document, yet she did not strike out the clause
that read, "the undersigned individual is authorized to
execute this application on behalf of the Customer".

Justice Masuhara noted that while in many cases it is standard
practice to require directors' resolutions when security is
granted, this is not always the case. Additionally, no case law was
presented by the parties to support the proposition that further
steps were required to determine the proper authority of Accra.
There was no evidence of law supporting the proposition that an
employee who is an office manager and who is responsible for
accounts payable and other administrative duties, is presumed not
to have authority to execute an agreement on behalf of his/her
employer, including the granting of security. The Court determined
therefore that the Trustee was not justified in departing from the
Indoor Management Rule and disallowing the claim of
Formations.6 The Trustee's alternative arguments
regarding the prominence of the placement of the security granting
clause within the credit application were also dismissed by the
Court.

The important point to note in this case is that it is still the
best practice to obtain certified directors' resolutions
authorizing significant transactions entered into by a company or
authorizing a person to enter into material documents on behalf of
the company whenever possible. However, in those situations where a
resolution was not obtained, the Indoor Management Rule may be
available as a mechanism to protect parties dealing with companies
and appropriate signing authorities. In the right circumstances,
lenders may rely on upon documents signed by those that appear to
have the authority to do so. The "right circumstances"
can vary, depending upon anything from the number of years the
person signing the document has worked at the company, how often a
particular type of transaction is entered into, and the level of
knowledge of the lender as to the internal processes of the
relevant corporation.

Footnotes

1 Accra Wood Products Ltd., Re, 2014 BCSC 1259
[Accra Wood Products].

2 Accra Wood Products at para 25.

3 Accra Wood Products at para 21.

4 Accra Wood Products at para 22.

5 Accra Wood Products, at para 24.

6 Accra Wood Products, at paras 27 and
30.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Data protection presents one of the biggest challenges for both trustees and employers in 2018. As data controllers get ready for the GDPR, they are faced with problems in ensuring that existing processes and policies comply with the new law.

This Q&A session, led by pensions and information lawyers, will focus on practical solutions for how trustees and employers should deal with member communications, third party service providers and reporting data breaches, as well as any other areas that affect you.

Data protection presents one of the biggest challenges for both trustees and employers in 2018. As data controllers get ready for the GDPR, they are faced with problems in ensuring that existing processes and policies comply with the new law.

This Q&A session, led by pensions and information lawyers, will focus on practical solutions for how trustees and employers should deal with member communications, third party service providers and reporting data breaches, as well as any other areas that affect you.

2018 is set to be another big year in employment, with employers set to face new challenges and responsibilities. At our event, looking ahead to next year, we will be discussing four key issues you might face in 2018, providing useful tips and answering your questions.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here

If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you
are granted a non-exclusive, revocable license to access the Website under its
terms and conditions of use. Your use of the Website constitutes your agreement
to the following terms and conditions of use. Mondaq Ltd may terminate your use
of the Website if you are in breach of these terms and conditions or if Mondaq
Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to
read the full text of the content and articles available (the Content). You may
not modify, publish, transmit, transfer or sell, reproduce, create derivative
works from, distribute, perform, link, display, or in any way exploit any of the
Content, in whole or in part, except as expressly permitted in these terms &
conditions or with the prior written consent of Mondaq Ltd. You may not use
electronic or other means to extract details or information about Mondaq.com’s
content, users or contributors in order to offer them any services or products
which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the
suitability of the information contained in the documents and related graphics
published on this server for any purpose. All such documents and related
graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or
its respective suppliers hereby disclaim all warranties and conditions with
regard to this information, including all implied warranties and conditions of
merchantability, fitness for a particular purpose, title and non-infringement.
In no event shall Mondaq Ltd and/or its respective suppliers be liable for any
special, indirect or consequential damages or any damages whatsoever resulting
from loss of use, data or profits, whether in an action of contract, negligence
or other tortious action, arising out of or in connection with the use or
performance of information available from this server.

The documents and related graphics published on this server could include
technical inaccuracies or typographical errors. Changes are periodically added
to the information herein. Mondaq Ltd and/or its respective suppliers may make
improvements and/or changes in the product(s) and/or the program(s) described
herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally
identifies you, including what sort of information you are interested in, for
three primary purposes:

To allow you to personalize the Mondaq websites you are visiting.

To enable features such as password reminder, newsletter alerts, email a
colleague, and linking from Mondaq (and its affiliate sites) to your website.

Mondaq (and its affiliate sites) do not sell or provide your details to third
parties other than information providers. The reason we provide our information
providers with this information is so that they can measure the response their
articles are receiving and provide you with information about their products and
services.

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to
view the free information on the site. We also collect information from our
users at several different points on the websites: this is so that we can
customise the sites according to individual usage, provide 'session-aware'
functionality, and ensure that content is acquired and developed appropriately.
This gives us an overall picture of our user profiles, which in turn shows to
our Editorial Contributors the type of person they are reaching by posting
articles on Mondaq (and its affiliate sites) – meaning more free content for
registered users.

We are only able to provide the material on the Mondaq (and its affiliate
sites) site free to site visitors because we can pass on information about the
pages that users are viewing and the personal information users provide to us
(e.g. email addresses) to reputable contributing firms such as law firms who
author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us
not to disclose your details to any of these parties, please tick the box above
or tick the box marked "Opt out of Registration Information Disclosure" on the
Your Profile page. We and our author organisations may only contact you via
email or other means if you allow us to do so. Users can opt out of contact when
they register on the site, or send an email to unsubscribe@mondaq.com with “no
disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate
registration form. This is a personalised service where users choose regions and
topics of interest and we send it only to those users who have requested it.
Users can stop receiving these Alerts by going to the Mondaq News Alerts page
and deselecting all interest areas. In the same way users can amend their
personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an
identifying user number. The cookies do not contain any personal information
about users. We use the cookie so users do not have to log in every time they
use the service and the cookie will automatically expire if you do not visit the
Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to
personalise a user's experience of the site (for example to show information
specific to a user's region). As the Mondaq sites are fully personalised and
cookies are essential to its core technology the site will function
unpredictably with browsers that do not support cookies - or where cookies are
disabled (in these circumstances we advise you to attempt to locate the
information you require elsewhere on the web). However if you are concerned
about the presence of a Mondaq cookie on your machine you can also choose to
expire the cookie immediately (remove it) by selecting the 'Log Off' menu option
as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example,
advertisers). However, we have no access to or control over these cookies and we
are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement,
and gather broad demographic information for aggregate use. IP addresses are not
linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or
its affiliate sites) are not responsible for the privacy practices of such other
sites. We encourage our users to be aware when they leave our site and to read
the privacy statements of these third party sites. This privacy statement
applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or
contests. Participation in these surveys or contests is completely voluntary and
the user therefore has a choice whether or not to disclose any information
requested. Information requested may include contact information (such as name
and delivery address), and demographic information (such as postcode, age
level). Contact information will be used to notify the winners and award prizes.
Survey information will be used for purposes of monitoring or improving the
functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our
site, we ask them for the friend’s name and email address. Mondaq stores this
information and may contact the friend to invite them to register with Mondaq,
but they will not be contacted more than once. The friend may contact Mondaq to
request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’
information. When users submit sensitive information via the website, your
information is protected using firewalls and other security technology. If you
have any questions about the security at our website, you can send an email to
webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode),
or if a user no longer desires our service, we will endeavour to provide a way
to correct, update or remove that user’s personal data provided to us. This can
usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will
post those changes on our site so our users are always aware of what information
we collect, how we use it, and under what circumstances, if any, we disclose it.
If at any point we decide to use personally identifiable information in a manner
different from that stated at the time it was collected, we will notify users by
way of an email. Users will have a choice as to whether or not we use their
information in this different manner. We will use information in accordance with
the privacy policy under which the information was collected.

How to contact Mondaq

If for some reason you believe Mondaq Ltd. has not adhered to these
principles, please notify us by e-mail at problems@mondaq.com and we will use
commercially reasonable efforts to determine and correct the problem promptly.

By clicking Register you state you have read and agree to our Terms and Conditions